Total Loss-Absorbing Capacity (TLAC) represents the aggregate amount of financial resources, encompassing equity and certain types of debt instruments, that a financial institution possesses to absorb losses in a crisis. This capacity prevents the need for public bailout funds and avoids systemic instability. It is a critical component for financial sector resilience.
Mechanism
For crypto institutions or large decentralized finance (DeFi) protocols, TLAC would comprise stablecoin reserves, native tokens, staked assets, and specific debt instruments structured to convert into equity or be written down upon predetermined trigger events. These resources are designed to recapitalize the entity or protocol following severe, unexpected losses, ensuring solvency.
Methodology
The strategic approach involves establishing stringent capital adequacy requirements and structuring a hierarchy of financial instruments specifically designed for loss absorption. This aims to ensure that failing crypto exchanges, custodians, or lending platforms can be resolved in an orderly manner. Such a framework protects depositors and prevents contagion across the broader digital asset market without taxpayer intervention.
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